Q4 2020 SPX FLOW Inc Earnings Call
Okay.
Thank you for standing by and welcome to the SP X flow key.
Q4, 'twenty 'twenty earnings conference call at this time, all participants are in a listen only mode.
After the Speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded to ask a question. During the session you will need to press star one on your telephone keypad. If you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today.
Mr. Scott Geffner. Thank you. Please go ahead.
Thanks, Paul and good morning, everyone. Thanks for joining us for our discussion of our fourth quarter 'twenty and 'twenty financial highlights. This morning, we issued a news release detailing our financial performance for the three months ending December 31st 2020.
The news release, along with the presentation to be used during today's webcast can be accessed on our website at SPX flow Dot com.
And a replay will also be available on our website later today.
Joining me on the call are Marc Michael President and CEO, and Jamie Easley, Vice President and Chief Financial Officer.
Taking a quick look at today's agenda and Mark will highlight our accomplishments in 2020 discuss sequential order trends and close with a view of 2021.
Jamie will then walk through the details of the fourth quarter and full year results per.
Provide some insights into the first quarter of the year, along with a discussion of both our long term capital allocation framework and capital allocation of accomplishments in 2020 and.
And Mark is going to wrap up with an update on our strategic objectives.
Following our prepared remarks, we'll open the call for questions.
Before we begin our.
A brief reminder, that elements of this presentation contain forward looking statements.
And that are based on our current view of our business and markets. Those elements are subject to change we ask that you view them and that light.
Principal risk factors that may impact our performance are identified and our most recent SEC filings.
And the appendix of today's presentation, we have provided reconciliations for all non-GAAP and adjusted measures.
And with that I'll turn the call over to Mark.
Thanks for the introduction Scott Good morning, everyone and thank you for joining us on the call.
We navigated through many challenges in 'twenty, and 'twenty and I'm proud of the courage compassion and commitment demonstrated by our global team members throughout the year.
Despite the many personal and operational difficulties caused by the COVID-19 pandemic.
Our people focused their efforts on what they control by creating and outstanding experience for our customers improving.
Improving our culture of belonging and driving profitable growth and our key technologies and services.
These outcomes are based on the foundation of 80, 20, which we launched across the company at the start of the year.
80, 20 is providing a framework to build future growth and profit acceleration by identifying those products and customers and our target markets that are most likely to generate the best results, while simplifying how we do business.
By focusing our attention and resources on high growth and margin business. We've also been able to identify areas, where we can accelerate productivity actions and reduce cost.
Our progress last year with significant and will continue to accelerate in 'twenty and 'twenty one.
We continue to invest and our people first culture by prioritizing the safety health and wellbeing of all our team members.
Last year total recordable incident rates declined by 20%, reaching the lowest level in company history.
And team member engagement scores were up over 20%.
Investments were made into our mission to create and outstanding experience for our customers through organizational alignment and new digital capabilities.
And the face of a pandemic, we redefined our portfolio through the sale of power and energy <unk>.
Continued discipline on project selectivity and executed well and sustained a focus on costs, which delivered a positive outcome.
And we maintained a strong financial position and liquidity, while systematically deploying capital to high return organic investments and programmatically looking for value creating acquisition opportunities.
We enter 'twenty 'twenty, one and a position of strength and I'm excited about the opportunities ahead of us.
Yeah.
As we continue our journey to high performance I would like to highlight the meaningful strides we made in 'twenty and 'twenty.
The shift to a process solutions business, serving a central markets is resulting in more resiliency with orders and revenue improving sequentially. Following the initial impacts of COVID-19.
Orders ended the year better than we originally planned as demand continued to improve.
Our emphasis on higher quality of revenue and focus on productivity and cost containment was evident and our gross margin expansion of nearly 20 points despite revenues being down 10%.
Notably decremental margins were just 20%, reflecting our agile operating structure.
We executed on and more balanced capital deployment strategy announcing two acquisitions.
Completing the buyout of our Korean JV.
Returning capital to shareholders with $20 million and share repurchases.
And reducing our outstanding debt position by $300 million, resulting and $17 million of annual interest savings.
During 2020, we generated strong adjusted free cash flow of $125 million supported by approximately a 40 million dollar reduction and working capital.
We entered this year with the strongest balance sheet in company history at a net cash position with ample liquidity to support our strategic priorities.
Sequentially orders accelerated and were meaningfully better than we anticipated heading into the quarter.
And with resiliency and both segments.
Industrial orders were up 14% sequentially, which was ahead of expectations.
Encouragingly customers release funds for several large capital projects with concentration in North America.
We also saw a follow through of sequential growth and our short cycle product categories, which was broad based by technology and geography.
And food and beverage orders were up 24% sequentially, which was also well ahead of expectation across all categories.
The outcome for the quarter reflects the ongoing market demand for essential products that utilize our food and beverage systems and equipment.
And systems, we continue to see demand for our technology, which provides solutions for producing specialty and plant based beverages as well as affirmative dairy products.
And orders for components and aftermarket products were up double digits and the quarter, reaching one of the highest levels we've ever had for that part of the business.
Overall, our orders and results in Q4 exceeded our expectations across both segments positioning us well as we enter 2021.
As we entered the year, we're taking a balanced approach with our demand forecast.
It is encouraging the global economic outlook indicators have improved as demonstrated in our results are exiting 'twenty and 'twenty.
We are remaining prudent and are planning based on the potential for ongoing impacts from the pandemic.
We're planning for revenues to grow low to mid single digits organically with operating margins showing sequential improvement as the year progresses.
We made further progress on our objective to achieve a higher quality of revenue last year and 80 20 is providing a foundation to continue this effort.
With that as a backdrop will continue to focus on those items that are under our control to create a high level of performance irrespective of market conditions.
We've built and agile operating structure with a culture of productivity, while instilling a profitability mindset throughout the organization.
Our 2% to 3% cost out program is yielding the desired results, but the opportunity remains high for the continued improvement.
And 2021, we're actioning a $25 million productivity program that is focused on SG&A spending.
But this is not just a cost out program.
Through our 80 20 initiatives, we are simplifying how we do business and refining where we do business, which provides direction and allocation of resources to high growth high margin revenue streams, while creating productivity.
We will also plan to systematically invest capex into factory modernization and innovation above historical levels with disproportionate spending on those areas that have the potential.
To create the highest returns.
Finally, our programmatic M&A process is yielding results evidenced by the closing of <unk>, and 'twenty and 'twenty and U T. G mixing group in January.
We are encouraged and an attractive pipeline of opportunities continues to build.
And with that I'll turn the call over to Jamie to cover our financials.
Thanks, Mark and good morning, everyone I'll begin with a brief recap of 2020.
And as Mark mentioned in his opening remarks, we are focused on what we control 2000, Twenty's strong operational performance and the face of significant headwinds as proof that this approach is working.
Our teams and met the challenge by keeping safety as the priority managed labor plans tightly reduce discretionary costs and optimized inventory levels, while serving the demands of our customers and our central markets.
And total orders for the year were only down about 7% as.
And those markets reacted to COVID-19, with the first half being most impacted.
Food and beverage orders were down about 8%, primarily due to a 16% decline and our systems business, which we think was largely due to delays and capital spending we are encouraged that front logs and project funnels remains strong as we head into 2021.
Components and aftermarket orders were only down low single digits driven in part by our 80 20 and focus on growing key accounts.
Within the industrial segment orders declined 7% due to weakness and short cycle product categories.
We did see demand for these products rebounded and second half for the year, but demand remains below pre pandemic levels.
Revenues declined 10% for the year, approximately half of which we expected coming into the year with lower backlog from selectivity on lower margin offerings in 2019.
And while such revenue declines declines would normally drive down our gross margins they actually improved by approximately 20 basis points our.
Our purposeful efforts to create higher quality revenue streams was the primary driver with food and beverage gross margins up 300 basis points due to improved mix and solid execution.
For the year decremental margins held to about 20 per cent the productivity initiatives of our GMO team along with strict cost controls across the business limited the impact on lower revenues and profitability.
Yeah.
Our fourth quarter results highlight the resiliency of our revenue and our progress towards driving a higher degree of operational improvements organic revenue grew 5% and the quarter a short cycle product categories continued to recover and our systems business posted strong revenue growth.
Orders were only down 5% versus our expectation that they would declined 15% to 20% with meaningful outperformance across most product categories in both segments.
Segment income margins were down year over year.
As we had expected coming into the quarter, we had a difficult comp and F&B and 2019, and a higher mix of project and systems revenues in 'twenty, and 'twenty, which supports our higher margin aftermarket business and the long term.
And lastly, our team did a phenomenal job converting our revenue into cash and the fourth quarter.
Adjusted free cash flow as we will see on the next chart was an impressive $85 million.
Operational working capital balances as we defined them were reduced by approximately $50 million and Q4 and $40 million year over year on a constant currency basis. The biggest drivers were accounts receivable and inventory our teams dramatically reduce past due receivables and use the cross functional SIOP processes to optum.
<unk> inventory levels.
These were plans our teams have been executing against all year and it was nice to see the benefits materialize beginning in October and hold throughout Q4 and.
I would personally like to thank our teams for their focus on cash and our collective drive towards achieving optimal sustainable working capital levels relative to volume.
Looking at the segments beginning with industrial.
Orders declined 4% with strength in North America, offset by weakness in China.
Importantly, we did see some improvement and our short cycle high margin product categories and the quarter.
We saw a high level of demand for OE projects during Q4 with a building front log of orders to start 2021 as demand for our products remains strong.
Organic revenue increased 6% and the quarter and segment margins were down 90 basis points to 11, 6%.
This was primarily due to a higher mix of project business and less short cycle revenue.
Yeah.
Moving on to food and beverage orders declined 5% as increased component orders were more than offset by a decrease and systems.
<unk> orders were relatively strong across most geographies, while the decline and systems was concentrated in Europe.
Revenue in the quarter was strong with organic revenue up 5%. This.
And this was predominantly driven by our systems business, which posted a revenue increase of over 20%.
Revenue for our higher margin components were flat and our service revenues were down low single digits.
This lower mix year over year was a primary factor and the lower gross margins.
We also had a difficult year over year comparison, and the fourth quarter of 2019 from a profitability perspective. As Q4 2019 included the positive impact of several large project Closeouts, which we did not expect to repeat in 'twenty and 'twenty.
And as Mark mentioned the launch of 80 20 has provided US a foundation to identify efficient areas of growth.
Moving into 2021 and beyond we're using zero based budgeting concepts to focus our spend on supporting our differentiating capabilities and key customers.
We will overinvest and those areas, while reducing low value or wasteful task elsewhere and the organization.
By instilling a productivity mindset companywide, we see a path to sustained margin expansion and increase for free cash flow over the coming years.
As Mark mentioned, we are implementing a $25 million of SG&A cost productivity program, which also includes resource allocation to disproportionately invest and growth.
The program is expected to realize $10 million of savings weighted and the second half of 2021 with the remaining $15 million carried over into 'twenty and 'twenty two.
We expect the cash cost to achieve these results to be $20 million to $25 million, most all of which should be accrued and paid and the year.
We will update the progress of this program quarterly going forward.
Yeah.
Looking at the first quarter of the year, we are prudently optimistic regarding order trends customer buying patterns impacted by COVID-19, as the primary factor and variability relative to this view.
We do have line of sight to improved revenues year over year as our first quarter shippable backlog is up $40 million versus where we entered 2020.
The improvement was driven by the nature of our strong fourth quarter, 'twenty and 'twenty order rates.
Based on our calendar convention, the first quarter of 'twenty 'twenty, one and we'll have five additional shipping days.
For the full year, we will have one less day with six fewer days year over year and the fourth quarter.
We expect segment margins and the first quarter to be flat sequentially to the fourth quarter.
I will also mention that we closed the acquisition of U T. G. Mixing group on January the 18th which I'll cover in more detail at the end of my remarks.
Yeah.
And lastly, I did want to note an important change to our adjusted results based on our recent success and closing two acquisitions, a building pipeline of M&A opportunities and a strong balance sheet, we do expect to be more acquisitive over the next three years than we were and the first five years of being a standalone public company.
In 'twenty and 'twenty, one we are revising our definition of adjusted earnings to exclude discrete M&A cost, including deal fees and inventory step ups and amortization of acquired intangibles.
We believe this will provide investors with a more accurate measure of our performance and it will make it easier for peer comparisons.
And system with our historical approach, we will continue to exclude the effects of restructuring when reporting adjusted results.
Instead of restating all prior periods for the impact of this change now we will plan to revise the comparative periods. Each time, we report results going forward.
Taking a brief look on our financial position at the end of the year, we had a net cash position of $32 million, resulting from a strong year of cash generation along with the proceeds of the power and energy divestiture.
A portion of those proceeds were used to retire our $300 million 'twenty 'twenty four senior notes in August last year.
We now have close to $1 billion of available liquidity.
The strength of our balance sheet and annual cash generation and provide us the ability to disproportionately reinvest and organic opportunities while simultaneously pursuing high returning acquisitions and line with our strategic goals.
Given the strength of our balance sheet and the importance of capital allocation moving forward I did want to highlight our capital allocation priorities.
Our guiding principles for capital allocation are illustrated on this chart.
We intend to maintain a strong balance sheet and financial flexibility to allow us to invest and our business through all economic cycles.
We have a programmatic M&A process that is highly aligned with our strategic priorities.
Our target net leverage range is between one and a half in two and a half times, we were clearly below that level at the moment.
Our investment decisions will be based on generating attractive cash ROIC above our whack to drive compounding free cash flows.
For funding all attractive investment opportunities, we will evaluate the most efficient method to return cash excess cash to shareholders.
Yeah.
And 'twenty and 'twenty, we made meaningful progress on our capital allocation priorities as I mentioned on the prior slide we redeemed our 2020 for senior notes following the receipt of proceeds from the power and energy sale significantly reducing our gross leverage.
We increased R&D expense by approximately $3 million one of the areas, which we were planning to increase our organic investment levels.
We completed the acquisition of policy like polar and August and purchased the remaining shares of a Korean joint venture and the fourth quarter.
And Q4, we also announced the U T G mixing group tender offer process that resulted in us acquiring the business in January.
Lastly, we prudently return capital to our shareholders through our share buyback program by buying $20 million of stock and the year.
As I mentioned, we announced our acquisition of U T G mixing group and the fourth quarter and recently closed the transaction.
And January we are very excited to have the U T. G team on board you T. G brings along well recognized regional brands and technologies that complement our geographic exposure.
And product capabilities.
This acquisition is highly aligned with our strategic objectives as a company and provides both cost and revenue synergies.
The business has a high quality of revenue evidenced by its gross margin profile with that I'll turn the call back over to Mark for closing remarks. Thanks.
Thanks, Jamie as we close 2020 and look to the future we were thinking and acting more.
And really to change our historical paradigms to create an inflection point and operating results rather than a linear progression, which is overly reliant on and end market recovery.
The deployment of 80 20, it's now our foundation and provides a framework for a focus and clarity on how and where we want to grow profitably.
We've successfully elevated.
Excuse me, we've accessed for successfully evaluated our portfolio and began the process of disproportionately investing and our high growth and higher margin product categories that are aligned with our focus markets and customers.
Our plans will accelerate as we start 2021 irrespective of market conditions.
We will refocus our resources to those areas that generate the highest returns while expanding margins through increased productivity.
With our balance sheet strength and the cash generation of the business, we are well positioned to invest through economic cycles.
Organic capital allocation will be targeted to our highest returning technologies through investing in R&D to accelerate new product development deploying capex to modernize our factories and improve efficiency to meet customer demand and.
And rollout additional additional digital capabilities to create a better customer experience.
Additionally, our programmatic M&A process is building momentum and following the announcement and subsequent closing of two recent acquisitions.
We will continue to identify attractive M&A targets using a disciplined approach with an objective of high returns and alignment to our strategic priorities focusing on markets and technologies.
With capabilities, we believe we can win in.
And when we have excess cash we'll make returns to shareholders.
I'm proud of what our team has accomplished.
Together actions have created a strong culture, a more sustainable earning stream due to a higher quality of revenue.
And a foundation that allows us to shift to offense, which we expect will lead to accelerating growth and operating performance.
Divide a deeper understanding of our strategic direction, we will be hosting a virtual investor day on March 11th from nine to 11 30 Eastern standard time.
We plan to have and engaging program that will allow you to expand your knowledge of our plans for generating profitable growth and accelerating value creation.
For more details will be forthcoming, but if you'd like you can pre register on our Investor Relations website.
And with that we'll open it up for questions.
As a reminder, if you would like to ask a question simply press star and the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Nathan Jones with Stifel.
Good morning, everyone.
Good morning and afternoon.
It sounds like we'll get some more detail on me.
In March but I wanted to just talk a little bit about some of the growth investments here and investments, you're making internally into the business.
Last few years have averaged about $25 million and Capex youre talking about $40 million. This year talking about increasing the amount of iron and Jay.
Can you talk about where the Capex is going and if it's likely to sustain at a higher level going forward.
Where you are at R&D investments and <unk>.
At this energy SaaS kind of thing and why you would think that will end up over the next few years.
Yes, sure Nathan I'll take that one.
So I'll start with Capex to to your point we've.
We've had about $25 million or so and the last couple of years, we're planning to increase that to 40 million. We had made good progress over the course of this year I'll mention but as you work towards the end of the year. We had a couple of projects that were delayed and then we had some payments that will be due into 2021. So.
We are making progress towards increasing capex. The majority of that is going to be focused and monitor and modernizing some of the key factories that we have and also improving digital capabilities that we have so internally investing in tools that really allow us to serve our customers better.
On the R&D front, you mentioned and the additional R&D expense that we had in 'twenty and 'twenty I mentioned that in my prepared remarks, too we had an additional $3 million next year, we're planning to put another $3 million to $5 million and and R&D.
And that's going to also be.
Directed toward our higher growing product lines. So as we talk about 80, 20, and we split out our product lines around those that have the highest gross margins does that have the highest opportunity for growth. Our R&D will be spent predominantly in those categories.
And then I guess the way we should judge the success of that I mean, you're talking about high growth high margin and so we should say you're growing above market growth rate and we should take and expansion in gross margins here.
Over the next few years I'm talking about not necessarily and the next couple of quarters.
Yeah, that's right I mean, that's the that's the spirit of what we're doing we've looked critically at our product lines and we've evaluated those on the ones that have the best opportunity for growth and have the highest margins and the investments there are absolutely.
Targeted to drive a higher and better mix over time, Yeah, Hey, Nathan This is mark I'll add into that I mean, thats spot on and you know our mission is to profitably grow the business and that 80 Twin 20 Foundation that we referenced throughout the prepared remarks, and what we worked on throughout the course of last year.
Aligned with our strategy provides the framework to accomplish that so where we're laser focused on these higher growth higher.
Higher margin opportunities with with key accounts, and that's where our investment is going to go to those factories and those new product development opportunities are the digital capabilities to support key customers better. So that that's number one on our list and then there's the second piece I've mentioned, as we deploy capital and a and a greater way back and to.
To M&A, we're going to be doing the same thing. It's looking at those same types of markets. The same types of product lines and the.
And the M&A targets will be and will be centered around that.
Great I'm sure, we'll hear more about that myself on that alone.
Absolutely Thanks Nate.
And your.
And your next question comes from the line of Mike Halloran.
Let's see.
Morning, everyone. Good.
Morning, Mike.
So first on the guide for this year and maybe just give us some help on <unk>.
Context, what are the assumptions for sequential improvement for the year relative to normal seasonality and maybe some.
Help on what the competition looks like but between the two segments and any kind of underlying assumptions that we should be thinking about.
Yeah, Mike so.
Mark said in his remarks that we were expecting a low to mid single digits organic growth.
Want to make sure that we're calibrated too on what the the growth will be we also have about a point and a half of.
Growth expected from our recent acquisition of U T. G. And then also on the topline and we'll see growth as it relates to FX alone. So it'll have about three and a half or 350 bps of impact on the top line.
So back to the commentary we had around the discussion there with Nathan as we expect to see growth and our higher margin product categories. It's the way, we planned a year and and to Mark's point, It's wind back with our strategy. We've gone through we've repositioned our cost structure as we mentioned and some of the prepared remarks.
<unk>.
We are disproportionately investing in capex and R&D around those product lines really to drive disproportionate.
Profitable growth around that.
So so so that's what I'd say on the on the on the top line and then you know as it relates to margins. We did say as well that we expect Q1 to be sequentially flat to Q4, but expecting margins to expand over the course of the year and the way to think about that is it's really just driven by the improved mix.
That we would expect over the course of the year and then back on the SG&A line that we've got.
No.
The plan for that to be roughly flat year over year with some headwinds on.
Well I would say roughly flat that'll be on the on a basis of relativity to revenue.
So with revenues going up some of that being FX. We've also got some headwinds on the on the SG&A line and.
And some headwinds that we've got coming into the year just.
And as deflation merit, so the things that we would see and and the productivity initiatives that we kicked off a couple years back and the 2% to 3% cost out program really really nice to see those are expect to come through in 'twenty and 'twenty one and.
In addition to that the $25 million cost program that we're announcing this morning.
Yeah, I'll just add just maybe a point of clarity to Michael on the SG&A front, we expect SG&A on an absolute basis in terms of just the year over year as we committed to and in Q3 and I mentioned that we didn't plan on and increasing our SG&A on a core basis. So that's that's that's what's reflected and then as Jamie was mentioned and the progression through the year.
On the revenue line is going to predominantly come from these higher margin product categories as well as a category. We've got dubbed as balanced where we look at growing it but also expanding margins and if.
If you look at that revenue growth, we would expect probably somewhere in the neighborhood of 60% to 70 per cent of the revenue to be coming from those those higher margin product lines. So think again above company average. So those are the ones that get into that 40 to 50 per cent category of margin profiles and then the balance category are probably going.
30% to 40% of the revenue.
And that has margin profiles that are more kind of consistent with company average.
So as we look at how the year progresses, you know the encouraging part I think is as we exited.
'twenty and 'twenty, we did see good order progression and.
And the catalyst behind our short cycle business is going to be the initiatives that we have ongoing as well as the continued recovery and.
And the economies and and you know that's primarily and in the industrial space because industrial last year was really the area that was impacted the most and but continue that picked up as we exited the year, which was really encouraging so we want to see the industrial business and industrial markets continuing to gain momentum.
And GDP and PMI reflect debt, we would hopefully continue to see that happen and then I'm just really proud of our food and beverage business because if we if you look at for how we performed last year and food and beverage.
We exited the year and food and beverage with.
Really around mid teens margins on the segment income line and as Jamie mentioned, we expanded gross margins.
And you don't around 300 basis points so.
As we look at our food and beverage business. The short cycle business. There was pretty good throughout last year, but we expect that to really continue to to improve also so I'm really I'm really pleased and excited about where we are in the journey and as we kind of entered this year R.
Our goal will be to execute on these key high margin product lines across both categories, which will provide margin opportunities in terms of being accretive to our year over year basis as.
As well as some of these other points that Jamie and as mentioned around productivity and our factories and we're going to manage cost price really well. So really I think we're in a really great spot coming into the year.
And again I'll, just I'll keep coming back and I'm, just really excited about where our balance sheet is so that will be able to really deploy capital and a much different way that's going to help on all fronts organically and inorganically.
So thanks for that and just just clarifying.
I think what I was trying to get at too was twofold, one it sounds like the industrial piece youre expecting to outpace maybe the growth profile and food and beverage, but then secondarily are you assuming anything above normal sequentially from here or some sort of acceleration from and under amendment on.
Your line fundamental perspective, and any of those markets beyond you know.
Something more normalized and.
Just trying to get some context around those two pieces.
Yeah, I mean there'll be.
Food and beverage I would I would say you know theres a backlog coming into the year, that's going to support from a system standpoint.
And you know.
And the ration of revenue into the first half of the year.
On the bigger piece, there and will be how does the short cycle business hold up and food and beverage and again, it's held up well and we think our initiatives will continue to support progress there.
On the bigger pieces industrial I mean, that's where the headwinds were in 'twenty and 'twenty right I mean.
We had $80 million so roughly of revenue are down and in 2020.
Majority of that call it 70 per cent or so being short cycle business and if you step back from that and think about and industrial markets have really been challenged and so good indicators for our industrial business, our PMI and GDP as I was mentioned and we saw that acceleration.
Coming exiting 2020, and as we look to 'twenty 'twenty, one with stronger.
The economy is starting to open up stronger PMI stronger GDP, we would expect acceleration to outpace and our short cycle business as we as we go through 'twenty and 'twenty one.
So second question and then just on the.
And of the customer inventory supply chain pricing side, and maybe some update on how you guys are thinking about that any with channel inventory look like are you seeing any constraints on your own supply chain and how you're managing some of the inflation pressures.
Yeah, no constraints on supply chain, we've been fine there.
We've got.
Really good global supply chain base across all regions, we've talked to them about the about that before we purchased the majority of our materials and the regions, where we do business as well as produce the products when the regions, where we do business. So our.
Supply chains are in good shape I'm watching cost price closely as everyone is.
And you know some indicators of inflation are out there, but we feel good about where we are with what we've done.
On the price front.
Already coming into the year, so that we're gonna be in a position where we're managing.
Cost price well it is our plan so expecting you know to be to be neutral on cost price as we move through the year.
So really pleased we've made tremendous progress there and on cost price and the last couple of years with that supply chain team does a really great job and give us insights of what they're seeing with inflation and our commercial teams are.
And well out in front of any inflationary trends early and in the year and and the process. So I think we'll be and a good spot.
I appreciate that Mark Jamie. Thank you thanks, Mike Thanks, Mike.
And your next question comes from the line of Julian Mitchell with Barclays.
Hey, Good morning. This is Chris on for Julian and so maybe just looking at the margins a little bit more I know you guys had kind of sequential margin improvement through 'twenty, one and talked a lot about mix and then can you talk more about kind of temporary cost reversals. It seems like incentive comp may be already starting to come back in queue for Lat question that 35 million was that and then.
And how should we expect a $10 million of productivity savings to come through and the second half maybe by segment.
Yeah, so on incentive comp kind of two pieces and we think about long term incentive comp we did have.
Discrete reversal at the end of last year, which you'll see on the corporate line, which are really related to prior performance Awards 2018, and 2019 performance awards, which just won't vest as a product of Covid we.
And we expect that will be a headwind and that will come back on the kind of annual incentive we were pretty close to what we were what we would deem to be a run rate going forward. So there'll be a little bit of a headwind going into next year, but not a meaningful level.
And then on your question around SG&A and the second half of the year.
It'll be pretty evenly spread across the segments. We mentioned in the prepared remarks that we would expect about $10 million and the second half.
Some of that will end up and the corporate line some of that will end up and the segments, but.
The carryover of a $15 million into 'twenty and 'twenty. Two is also an important piece as you think about kind of where SG&A goes over the longer term.
You know the 'twenty 'twenty, one piece again as Mark said and I also said, we'll be keeping those levels flat.
Got it and that's very helpful. Thank you and then just maybe one more follow up back on that seasonality. It sounds like in terms of rapidly and seasonality sequentially. You guys are expecting thanks for you rather than normal and so just wondering if that implies kind of sounds like slow down and the second half.
Or if maybe it's a little bit better than normal seasonality in Q1 for on the top line perspective.
Yeah I think this markets you know Q1 is going to be supported by a better entering backlog and from an order profile perspective.
And we would anticipate that that orders maybe were similar to what we saw in Q1 last year. So if you think about Q1.
And what that would translate to is that additional backlog position that we mentioned of about $40 million better you would see and Q1, and then think of order profile as being similar to Q1 last year from a planning standpoint and.
And conversion rates and just at a similar level also so as we go through the year. We have prudently planned debt you know the second half, we're going to watch and see how things develop.
And that two to three per our low to mid single digit and <unk>.
Revenue stream and see how things kind of progressed through the year. So that's the goal and hope I would say as debt as was mentioned and to Mike's question is that the industrial markets as they pick up we should see that flow in through and our orders and revenue we were significantly down and 2000, Twenty's and can't about 80 million.
Overall, and industrial revenues of which 70 to 80 per cent of that was and our short cycle business. So.
So that hasn't recovered yet it was picking up recovering as we exited 2020, which was great to see during the second half.
But we're really looking for that recovery to gain legs as we move through.
'twenty 'twenty, one and as that picks up those would be you know good important catalyst to our revenue streams as we as we move through the entire year.
Got it thank you.
You bet.
Your next question comes from the line of Brett Linzey with vertical research.
Hi, good morning, everyone. Good morning.
Hey, just wanted to come back to the incremental margins, the 40 to 50, and industrial and something less and F&B makes sense you indicated that for most of 2020.
Is that the framework for the base level and then this this new $10 million 25 in total but $10 million. This year SG&A program would be in addition to that framework.
Hey, Brad just a point of clarification on your the first part of your question about the margins or your lead in there.
And I want to make sure I understood that I.
Oh I was talking about.
Previously indicated incremental margins and industrial would be and that 40% to 50% level.
For 2021.
And.
For F&B, something less and I'm just curious if that's still the base level thinking and then this new SG&A program.
On top of that yes, so just to clarify if you think about the revenue increases.
And for what we're out looking for for revenue and the low to mid single digits.
As you look at the margin profile of that revenue and how we plan for it.
And somewhere in the neighborhood of 70% of those revenues would be coming from those higher margin product lines. So that's the again that we've we've indicated and the 40% to 50% margin range.
Again from a planning standpoint again, you're spot on that those would be coming more from the industrial products overall as day as the industrial environment improves.
The other piece the other kind of 30%, let's call it would be from <unk>.
Product lines that are more in line with company margins.
So that's the way to kind of think about that and that and that low to mid single digit overall revenue growth again being more weighted.
And towards our industrial products.
Okay got it and then just a question on China, you mentioned as a driver of results and the prepared remarks, but specifically and F&B could you maybe just give a little color.
And what Youre seeing in the in the China region.
How did it perform in Q4 and into January and what's your expectation there for for the year. Yeah. I mean, it's good I mean, China continues to be a strong market for us our systems business. There is is very well respected.
A lot of affirmative dairy programs and projects are done.
And China, there is tends to be some lumpiness within that systems businesses, we know well that.
Some quarters can be up significantly and then we can have just some timing elements and other quarters, but we still see healthy opportunities coming out of China, as we look into 'twenty and 'twenty, one and our components and aftermarket business and and food and beverage continues to perform well there too so.
As we exited the year again food and beverage just hit it out of the park you know the day on down revenue, we had margin expansion and.
300 basis points on on the gross line and over 100 basis points on the segment income line on a year over year basis and.
And that's driven by a bit getting out of this dry dairy systems business, but that's really starting to trail behind us a bit also.
On the other thing that debt you know really.
Was exciting and our food and beverage business that.
Great project execution, and the team's doing a fantastic job with project execution and again good good cost price management overall, so really strong cost price management within that segment. So really excited about where food and beverage is the China market is a good market for us really across all regions, our food and beverage businesses are strong.
Business for Us nuances region to region on where we do systems versus components.
And but you know really a cornerstone for us.
Okay, Great I'll leave it there and pass it along thanks guys. Thank you.
Your next question comes from the line of Walter Liptak.
And with Seaport.
Hey, Thanks, good morning, everyone, great quarter, Yeah, Hi, well thank you.
Wanted to circle back on the industrial and.
It's nice to see orders up and getting close to that $200 million per quarter level again really good and.
Yeah.
I wondered if there was anything in the quarter.
If pricing was going up if you know how the channel reacted.
And.
With the order activity is looking like and the early part of 2021.
Yeah, I mean, I think going through the quarter and Q4, what I would say as orders continue to edge up as we move through the quarter and industrial.
Through our channel partners, we have great relationships, and we've been able to work with them and and maintained good cost price position as we've executed on our industrial opportunities through the quarter and and through the second half for the year for that matter.
So as we saw business coming back we didn't really see any any pressure from from pricing.
And then as we were coming into 2021 here.
I would say, we're pacing as we would have expected.
Acted coming into the year as I was indicating.
We're not we're not looking for is quite as strong a follow through here starting the first part of the year as we saw in December.
But we're looking forward to be a good quarter and it's on online and and try on.
In line and on track for with what we anticipated thus far.
Okay great.
And then on the 80 20.
Wanted to ask you about.
You know the activity levels of it have you rolled it out now to to all your divisions and employees or is this is this kind of a pace rollout that you're doing.
Yeah, Great Great question, Walt I'm glad you came back to it it's just such an important part of what we're doing because it just gives us to the focus and the framework around.
The right products the right markets the right customers that we want to do business with and grow with.
Good high margin.
High quality revenue streams.
And so yeah, we did this and in phases and waves. So we started with the product lines that we want to have the biggest growth and and they provide us with our best opportunity for market growth as well as the margin profiles. So that was the first wave the second wave.
Was what we would and so those are the growth products would be what we define as our balanced groups, so and the balance group that emphasis is around.
A bit of growth so make sure you grow into what the market is growing as well as over.
Over achieving and your aftermarket focus on your key accounts, but we also want you to work on profitability. So we wanted to expand the margins. So again that group as it has has margins that are more in line with company margins. So we want them to push their margin profiles up also as we as we go through the year third group is where we want to.
<unk> margins more it's it's a smaller cross section. It includes our systems business and so we've been doing this actually for the last couple of years already.
And so a smaller group there that.
Has a couple of product lines and it that we're working on with right now to get it fully rolled out but they've all been educated.
And 80 20, and the implementation is taking deep deep for group and that final group as we move through the first quarter here. So I'm pleased with where we are so far with the rollout and the journey.
And creating maturity around what the teams are focused on to get that profitable growth importantly, too as we look at for that gross coming from where we're looking.
And looking for productivity opportunities that will develop and areas that were.
And we're not going to place as much emphasis on that'll be part of the the cost opportunities that will have on the business as well as reallocating resources to those areas that we want to overachieve and so well on the journey, Walt and I expect as we move through the first half of this year, it'll be well and try and entrenched and well ingrained.
Okay got it. Thank you and then the last one for me is just on.
U T G mixing Jamie and thank you mentioned that the gross margins are nice on that business.
I wonder.
What kind of level are you looking at or what was <unk> and then is that sort of the profile that you are looking for higher gross margin.
M&A targets.
Yeah, well thanks good question so.
So the U T G margins are going to be 40% to 45% gross margins.
And it's absolutely our expectation as we do M&A that we find high quality revenue businesses and those are going to be accretive on the gross margin line.
Some of our businesses that will acquire they have different products and different margin profiles, but it's absolutely part of our screen is to look for businesses that have margins. The gross margins that are greater than our own yeah, and hey, Walter I would just add to that again just to reemphasize on our capital deployment and net M&A piece.
And align well with our strategy and these markets that we want to play in and around nutrition and health Spa.
Specialty industrial these key product lines that we keep referencing back to that or and this growth category that have margins they get get into that 40% to 50% gross margin range and and that's where our emphasis is.
And if it's the first screen that we do.
Got it passed those hurdles first and then we double click into where the value creation opportunities and being able to expand.
Products, both directions into the channel and key accounts.
As well as any as the cost synergies. So we're really excited about the debt.
And the first couple of steps, we've taken here and as I mentioned, we've got and active funnel.
We hope will be bearing some more fruit as we move through 2021 capital deployment and our strength of our balance sheet is really important to us and M&A is an important part of that as well as the organic piece and investing back into the company that was was talked about and and Capex New technologies R&D and then what.
And we're going to return to shareholders as we move through the year too.
Okay, Great alright, thank you.
Thanks, Paul.
Your next question comes from the line of Nigel Coe from Wolfe Research.
Hey, Good morning, guys. This is Brandon on for Nigel.
Good morning.
And so.
You guys talked about capital project release, and North America for industrial.
How is larger project activity and orders trended and you guys talked about your orders a little bit, but just specifically on the larger project activity and maybe a second part of question is is this just.
Some pent up demand and that's carrying through or can this sort of produce a bit of an air pocket at some point and the future just kind of wondering a little bit more about that activity.
I'm glad you asked that question because I.
And I've mentioned, the industrial business a couple of times here during the call and.
2020 was a challenging year and our industrial business and there was a lot of headwinds from the pandemic.
I'll just reference to the points again about 70% of our order reduction and revenues associated with that came from our short cycle business.
And about 30% from from project based business. So.
That that translate quickly into revenue when we talk about the short cycle business and so that's where you saw the revenue declines too.
So the project based business, what we saw happen throughout the course and most of last year was really not a lot of project releases happening in Q2, and Q3 and we did see some projects being released in Q4, primarily concentrated in North America, which is very encouraging what I would share with you is that.
Pent up demand piece, we do believe that is developing.
Not an air pocket, because we had saw some orders coming through in Q4.
Still pent up demands out there as we look across the regions for some of our key product lines and the industrial space and as we've done that assessment coming into the year.
It's an encouraging point and that's what we want to see how that develops and our arent industrial product line as economies open back up more as we get past this kind of winter months of the pandemic.
Front logs are looking good and hopefully then the follow through also happens with our short cycle business, which we would expect with a.
A higher growth rate economies and pmi's being stronger so industrial is set up we believe for a rebound as things get a stronger moving through not only 2021, but as we look to the future and 2022 even.
Did we lose you there.
And I am sorry here. Thanks, Thank you for the question.
And then maybe just maybe just a second if that's okay sure.
Is there is there any sort of meaningful.
And sort of M&A targets that you guys are speaking I know you guys mentioned some of some of the enhancements you guys are looking to do digitally.
And you also mentioned like health care markets.
And nutrition and industrial as high growth categories, but just thinking about the pipeline and how it's trending.
The constituents that you guys are targeting increased are.
Are you sort of now getting to a point where you're isolating.
A few that you really like.
Yeah.
And as I previously mentioned were our first screen that we look at is the key markets that we want to play and because they have really great growth profiles and they have and.
And attractive.
Value proposition for customers and that's the whole strategy behind our process solutions business the.
Next click into that is which product lines do we participate in and that part of the market.
Where can we.
Look for acquisitions to add to those capabilities, so either through new technologies, our new channel access.
And those are the important things that we're looking at so we've had a very robust process in place for the last couple of years, where we do those screens.
And to look at the markets to look at the products and to look at the channel opportunities that can be created as a result of that so again, our emphasis on the product side is these higher growth higher margin product lines, and both our food and beverage and our industrial businesses.
So think about mixing and think about pumping. We've mentioned this before I'm think about our high temperature processing capabilities and food and beverage.
These are interesting areas that we think that.
And that we can do well and and the market and as well as looking at a few adjacencies too.
Thank you so much you bet.
And.
And your final question comes from the line of being dry with RBC capital.
Good morning, everyone.
Morning, and maybe just start pick up right, where we left off here and Mark and I'm glad you mentioned Adjacencies does that open the door potentially to any new platforms.
And we're not going that far.
Stage and the game you know, we're we've done a lot of work to get ourselves for disposition and the adjacencies more would be around.
Technologies, where we already do some level of business, we may be though doing some level of.
And outsourcing of certain elements of those those pieces of componentry that we provide for example, but as we look at food and beverage for example, the systems that we've that we provide within food and beverage we.
We don't provide all that equipment in many cases, so we may have to go out and and source some of that so we're looking again at our technologies and the markets that we're playing in and saying where do we have gaps.
Not inconsistent with what I was describing if it's a technology and a mixture of pump business. If we've got a GAAP, we want to add to that and the technology or market access we want to add to that if we look at other areas of the business. If we've got a GAAP and a product that we are outsourcing, we want and maybe to potentially look at bringing debt into the.
And to the portfolio.
That's real helpful does that mean just based upon the gross margin thresholds as you look at these candidates that youre going to steer away from fixer uppers.
Well I think theres, a theres a theres two sides to that coin right.
We like the idea of and and we are focused on better gross margin businesses, but as we look at 80 20, and what we're doing with 80 20 that applies to not only our core business, but as we do and acquisition.
We will apply 80 20 to that acquisition, which we expect will create opportunities for.
Improvement to expand margins further that has to be the outcome to create value. So we'll use that as a platform to look at how we are.
Navigate to the highest margin revenue streams within any acquisition using 80 20 as well as look at areas where.
There may be lower margin revenue streams, where we can reduce that and and again grow the higher margin and a greater pace as well as again get productivity and cost out. So I think we will apply you know and opportunity here to do to acquire high margins as well.
Expand those margins.
Through growing the highest value revenue streams, while while creating productivity. So that's the exciting part you know we've got a platform and a framework to do that with now not only and identifying the opportunity but also <unk>.
Executing well on integration once we do that once that once the business becomes part of SPX flow.
Create long term value.
And that's a nice lead in to my second question and I think it's just a great move strategic move for you all to be embracing 80 20.
And.
Just if you look at all the successful industrial companies. They all have some unifying business system, whether its DBS, the Toyota production model and for.
For 80 20, it's been ITW I think growth the original book and IDEXX certainly has expanded on it so that's our path to success.
And I love hearing how you're doing it at your existing business lines using it for M&A opportunities how about in this SG&A.
Productivity initiative, how is 80 20 going to be employed there yeah.
Yeah. It's.
It's the backdrop for for for the assessment, we did throughout the course of 2020 as we were rolling out 80, 20, and so it's it's a it's a product on.
Of you know.
And that effort and that's just on the SG&A line that we're carving out and mentioning we we also look at it across our operations and again.
And again, how we apply resources to the higher quality revenue streams, which will as well as investment which will drive higher gross margins. So yeah definitely a backdrop deemed to what we did and in the course of 'twenty and 'twenty as we were rolling out 80 22.
And to identify areas, where we could gain productivity.
Great and just last question from me is for Jamie just a really impressive work on.
And improving working capital and but when I look at free cash flow in the quarter. It is so outsized I mean, it's I don't want to say, there's too much of a good thing, but do you do you want to level set are you able to level set cash flow more consistently throughout the year rather than a hockey stick.
And at at year, and we see the number of companies GE is making a big focus on this now so but just take us through what that opportunity might be.
Yeah, Great observation Dean and.
I'll start with we're very proud of what we did in Q4, a herculean effort by the team and focused on it all year, we knew that there was a risk and a COVID-19 year that you had some drift on accounts receivable.
We also knew that there was a chance that you ended up with too much inventory and the wrong places and I can tell you that mark and I and and our leadership team spent a lot of time working on detailed plans to make sure we're getting working capital and place so very comfortable with what the outcomes of what we did and and where we're starting out 2021, but you you're leading.
To a great point, which is also what we're focused on and it's gotta be level loaded and.
And it's also got to support at least on the inventory side, where we expect to grow the business. So do we have the right levels of inventory and the right places to support our key customers and the growth initiatives with them. So as we move into 'twenty and 'twenty, one and our objective is to absolutely have a more balanced approach to the.
And the movements and our working capital and I expect you know as the world begins to straighten out a little bit, but it'll be easier to do so but it's a it's top of mind certainly for all of our teams and.
I'd, just say and I mentioned, just one additional point on the inventory part D and we put in a great process called SIOP and and put a team around that.
About a year and a half ago and.
As with every team it takes them a little time to gain traction and we saw that happening as we move through the second half of the year. So that was a big contributor for this.
Access and and.
And the SIOP program that we put in place.
And then as Jamie mentioned the effort that we had on just overall accounts receivables and the team placing additional emphasis on closing out projects that were lingering for various reasons that needed to be addressed and our systems business. For example, some of those some of those projects take a bit.
A time to close out based on the just finalizing everything and so I mentioned in the prepared remarks, and and and the questions. Our systems business has just made such incredible strides over the last two years.
We brought in a great person Isabel Balmer, that's running that team and not only the execution.
And is outstanding and their attention to the details and closing out projects to make sure that we get the cash and at the and is also made incredible strides forward so as I.
And.
I'm coming back to food and beverage a bit but I, just really can't be prouder of that business and where we've gone with margins overall performance and what the future holds and so as our business and process solutions.
And that we've said we would expect over time is a very a much more consistent working capital cycle overall, it's much more short cycle, we have good systems execution.
All that should make the working capital cycles are much more consistent as we as we go through time.
Thank you and congrats on all the progress.
I appreciate it thank you.
Thank you for one there are no further on.
To your questions and sorry.
That's okay. Thanks for joining us on the call and we'll be around all day. If you have any questions. Thank you.
And thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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